Question

The Portfolio entry should be a minimum of 250 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources. For this week’s portfolio activity, please advise the instructor of the following:

• Utilizing the information provided in your course textbook(s) or other valid sources, briefly explain why company valuation is influenced by capital structure decisions.
• Please provide a brief update to the instructor on how you feel you are doing so far this term.  

Answer 1

THE COMPANIES ARE VALUED BASED ON VERY DIFFERENT TYPES OF MODELS . ONE IMPORTANT AND MOST FOCUSSED AREA IS THE CAPITAL STRUCTURE OF THE COMPANY. THE DEBT A COMPANY HAS AS COMPARED TO ITS MARKET CAP HAS A LOT TO DO WITH THE COMPANY'S FUTURE PROJECTIONS. ALSO WE HAVE TO SEE WHAT IS THE RETURN ON INVESTMENT THE COMPANY IS ACHIEVING. WHETHER LESSENING THE DIVIDEND PAYOUT AND RETAINGING THE EARNING WOULD ENHANCE THE COMPANY'S VALUE IS TO BE SEEN. WE HAVE MANY MODELS SUCH AS GORDONS GROWTH MODEL THAT STUDIES THE GROWTH PATTERNS OF THE COMPANY AND THEN VALUES ITS EQUITY.

ALSO THE FREE CASH FLOW APPROACH TAKES INTO ACCOUNT THE AMOUNT OF BORROWINGS THAT A COMPANY HAS UNDERTAKEN AND THE AMOUNT OF INTEREST THAT HAS TO BE PAID ALSO THE WACC CALCULATION TAKES INTO ACCOUNT THE COST AND THE WEIGHT OF THE DEBT.

A COMPANY WITH NO DEBT HAS ALL ITS EARNINGS FOR THE SHARE HOLDERS AND NO PART IS DIVERTED TO THE OTHERS SO IT RESULTS IN HIGHER EPS ALSO ISSUING A LOT OF SHARES MAY ALSO DILUTE THE EPS .

THE COMPANY MIGHT ISSUE PREFERENCE SHARES WITH CUMULATIVE OR NON -CUMULATIVE INTEREST THIS ALSO HELPS IN THE VARIATION OF THE CAPITAL STRUCTURE BECAUSE THEY NOW SHARE THE PROFITS ALONG WITH THE EQUITY SHARE HOLDERS AND HAVE A PREFERENCE OVER THEM

SO AN OPTIMUM CAPITAL STRUCTURE ENSURES GROWTH AND STABILITY FOR A COMPANY AND THUS TAKES INTO ACCOUNT ITS VALUATION